Home values increase over time regardless of housing bubbles and speculative activity. That means someone who bought their home in Philadelphia 30 or 40 years ago has quite a lot of appreciation in their home known as equity. Normally equity is locked up in the home until it’s sold, causing a problem for a homeowner who needs cash, but doesn’t want to sell or take out a home equity loan. One solution is a reverse mortgage, a mortgage product that’s available for homeowners who are 62 years and older. Here’s a look at how reverse mortgages work:
The Basics of a Reverse Mortgage
A reverse mortgage gets its name because it’s the opposite of a traditional mortgage: instead of paying the bank for the home, the bank pays you, the homeowner. Essentially the bank is buying the equity in your home, although not all of it. And because the bank only has a partial interest in the home, it cannot sell the property until you decide to sell, move out for over a year, or pass away.
Who Can Get a Reverse Mortgage?
Homeowners who are 62 years or older and have a lot of equity in their home. The structure has to be the primary residence, but it can be a single family home, multi-family with up to four units, condominium, or pre-fabricated home. A qualifying homeowner who has a small mortgage balance can still receive a reverse mortgage and use the funds to pay off the balance of the original loan. The reverse mortgage requirements are fairly simple, but it’s always best to talk to an expert at a Philadelphia mortgage company to learn more about the loan instrument.
A Reverse Mortgage Frees Up Money
When a homeowner takes on a reverse mortgage, they are still responsible for paying property taxes, home maintenance, associated fees, and insurance. But instead of sourcing that money from a fixed income, the money comes from the equity in the home. Less pressure is put on the monthly income and the homeowner gains increased financial security.
You can receive money in one of four ways: lump sum, monthly annuity while you live in the home or for a defined period of time, or a line of credit. It’s possible to mix the different options and get some money up front, then paid out over time or use a line of credit.
The Homeowner Stays in the Home
As long as the homeowner satisfies the terms of a reverse mortgage, they don’t have to leave the home. The same goes for a married couple in the event one spouse passes away as long as both names are on the mortgage deed. This issue should be carefully investigated and discussed with a reverse mortgage expert at a Philadelphia mortgage company as legal issues could complicate inheritance.
Ultimately the homeowner benefits by getting cash and can stay in their Philadelphia home without the need to sell unless they want to.
The Mortgage is Guaranteed by the FHA
Almost all reverse mortgages are backed by the FHA through a program known as the Home Equity Conversion Mortgages (HECM). The loan itself is originated and funded by the bank that offers the reverse mortgage, but the government guarantees payment if the bank stops making payments or goes under. The FHA also guarantees the value of the home even if it loses value. In the event the home value is less than the amount of the reverse mortgage, the FHA pays the difference. The homeowner doesn’t have to worry about a short sale situation, much less the lender going after the homeowner or their heris for the difference.
A reverse mortgage can make a lot of financial sense for someone who wants to take advantage of the equity in their home and reduce their monthly expenses. It’s always best to talk to a Philadelphia mortgage company to learn more about the pros and cons of a reverse mortgage.